Agricultural input business development policies and constraints in Africa:

49. While agricultural inputs have played a dominant role in increasing agricultural growth in other regions of the world, the same could not be said for Africa over the last 40 years. This chapter first reviews past policies that have supported or undermined agricultural input business development in Africa. The constraints to input adoption and market development are laid out in detail in the chapter. Key opportunities for governments and the private sector in input business development are then summarized.

3.1.1 Past policies and support actions in agricultural input development in Africa

50. In this subsection, previous agricultural input policies in Africa will generally be defined in terms of two periods: the pre-reform period of the 1970s and early 1980s and the reform period of the 1980s and early 1990s. The specific policies carried out in these two periods differ by country, although there are broad similarities across countries that will be summarized here.

These policies are also important in shaping today’s political environment toward inputs (which continues to be varied across countries) because there are remnants of both eras in each country’s agricultural input strategy. Increasingly, there is also a return to the policies of the pre-reform period so it is crucial to review this period to avoid repeating the same mistakes.

Pre-reform period

51. In the 1960s and 1970s, donors and African governments relied heavily on input subsidies and provision of complementary services such as marketing, infrastructure, extension, research and the establishment of input and commodity marketing parastatals. Many of the policies during this period were implemented in order to support the activities of the State and State enterprises in input provision (Timmer, 1986, 1989; Delgado and Mellor, 1984). The justification for these actions is evident when viewed in the context of the period. The oil shock of the 1970s had just driven up the price of fertilizer to levels unaffordable by most African farmers. Many African countries had a general mistrust of the ability of markets to provide key services and inputs. It was believed that agricultural development would have to occur on a large “modern” scale and that the State would be the most efficient manager of such commercial activities. Therefore, the government became the main controller of input production, marketing, distribution and credit supply.

52. Adopting the characterization from Kherallah et al. 2002, the policies of this period can be summarized into four main points. First, agricultural input production and distribution were directly or indirectly controlled by the government and heavily regulated (Kherallah et al. 2002, Tripp and Rohrbach 2001). During this period, at least 30 out of 39 African countries surveyed reported that input distribution was controlled by a State monopoly (Kherallah et al. 2002). The allocation of agricultural inputs, particularly fertilizer, was determined administratively, often on arbitrary reasons such as usage in previous years. Seeds were and continue to be produced, multiplied and distributed by parastatals at extremely high costs. Seeds were also heavily regulated by national agencies with strict quality standards that serve to perpetuate the State monopoly control over the multiplication. In many countries, even to this day, only specific seed varieties that have been approved by the official variety release committee can be sold. In addition, many governments continue to distribute seed at extremely low prices or for free as part of emergency relief programmes that in some cases are not halted after the emergency has passed (Tripp and Rohrbach 2001).

53. Secondly, agricultural inputs were heavily subsidized by the government. In many cases, seeds were distributed for free, implying a 100 per cent subsidy. Fertilizer subsidies ranged from 10 to 80 per cent of the full cost of the fertilizer (Kherallah et al. 2002). During this period, 24 out of 26 African countries surveyed had at least “some” fertilizer subsidies (World Bank, 1994).

54. Third, governments often provided agricultural inputs to farmers on credit. Although there had been much effort at targeting these loans to smallholders, in most cases they ended up in the hands of larger farmers and commercial cash crop growers (Kherallah et al. 2002).

55. Fourth, in-kind aid from donors represented a high proportion of fertilizer imports during this period. This caused inconsistencies in the level and frequency of fertilizer availability, disrupted private sector interest in providing fertilizer and limited the varieties that were available for farmers to choose from.

56. The impacts of these kinds of policies are hardly surprising. These policies supported the public provision of seeds and fertilizer at the expense of the development of a commercial sector, which is specifically what they were designed to do. The unintentional consequences were that these programmes were highly economically inefficient, expensive and only able to survive as long as they were supported by donor funding or in-kind aid. In addition, although many elements were justified on equity grounds (such as subsidies), they were most often ill-targeted or used instead for patronage purposes, which isolated private sector stakeholders from access to the inputs needed to increase productivity and incomes.

Input market reform

57. The severe macroeconomic imbalances that resulted from the pre-reform policies led many countries to try out market reforms in the mid-1980s. Although each country followed a unique path, the major sector-specific reforms were the removal of fertilizer subsidies and price controls and the liberalization of fertilizer importation and distribution to private companies (Kherallah et al., 2002). By 1992, 17 out of 27 countries surveyed had removed subsidies and 23 had liberalized fertilizer marketing (World Bank, 1994).

58. This is not to say that these changes were permanent in every country. Some countries removed fertilizer support only to reestablish it years later in a permutated form. For example, Malawi removed fertilizer subsidies in 1995-96, but has since instituted a Starter Pack Initiative that involves the distribution of small amounts of inputs for free (Kherallah et al. 2002). Ethiopia has also phased out official fertilizer subsidies and government-controlled distribution, yet the government still plays a significant role in the provision of inputs.

59. Although many analysts have questioned the input market reform in Africa (Jayne et al., 2002; Dorward et al., 1998; Kydd et al., 2002), some authors illustrate that such reforms have resulted in the reduction of marketing margins, leading to better market integration, increased agricultural productivity and reduced transaction costs (Kherallah et al., 2000). The impacts of agricultural input reform have fallen somewhere between optimistic hopes and pessimistic concerns. Marketing costs are significantly lower in several countries than they would have been if the State-controlled programmes had continued to exist. For example, even under limited liberalization in Benin, the share of marketing costs over the CIF price fell from 40 to 50 per cent to just 25 per cent (Kherallah et al. 2002).

60. Kherallah et al. 2002 also looked at the impact of the reforms on fertilizer use. On aggregate, annual fertilizer use in SSA grew by 5 per cent from 1970 to 1993. This varies widely by country, however, with some experiencing a decline in usage rates following reforms (e.g., Rwanda and Somalia, which also experienced conflict during this period and had a low level of fertilizer use to begin with). In the majority of countries that use more than 10,000 tons of nutrients per year, fertilizer use increased in 14 out of 21 after reforms. In the countries that saw major declines in fertilizer use after reforms, most had significant reductions in subsidies or highly overvalued exchange rates. Another determining factor in the impact on fertilizer use was the proportion of fertilizer that was applied to tradable crops prior to the reforms. In general, countries using a large share of fertilizer on tradables saw less of an effect on fertilizer demand, and possibly even an increase in demand, than those that applied most of their fertilizer to non-tradables. This is because the real currency depreciation following macroeconomic reforms reduced incentives to apply fertilizer to non-tradables.

61. The removal of subsidies did not have a significant impact on agricultural output, mostly because application rates of agricultural inputs were so low in Africa to begin with. Since input subsidies were not effectively reaching the poorest households in the first place, their removal also

did not have any effect on poverty and rural incomes. It is now clear that increasing agricultural productivity requires efficient, effective, and timely supply and distribution of inputs. To complement this, appropriate technology transfer in the area of improved seed varieties, and the use of environmentally friendly agro-chemicals are imperative.

3.1.2 Constraints to effectiveness of past agricultural input business development policies

62. As illustrated in the previous section, successive African governments have made efforts to strengthen agricultural input development on the continent through the introduction of several policies and support actions. However, most of these have not aided in strengthening agricultural input development in Africa. The policies lacked targeting strategies to reach various categories of input suppliers and strictly followed a top-down planning process, in that all decision-making on their implementation emanated from the implementing agencies, with no apparent involvement of the private sector in policy planning, preparation and implementation.

63. Due to the nature of input markets in Africa, they have been isolated due to a low land-to-labour ratio, sporadically interrupted by government interventions and emergency relief. All of these factors cause domestic transportation and marketing costs to rise, which is then passed onto farmers in the form of higher prices. Since farmers cannot afford to take on risky inputs at such high prices, effective demand remains low and commercial providers never enter the market. Without a vibrant private sector, prices continue to remain high and the stagnant cycle continues.

64. Furthermore, many of Africa’s agricultural input policies lack implicit and explicit monitoring and evaluation impact mechanisms that would ensure that lessons learned from successes and failures of past policies are incorporated into future policies. Communities and individuals hardly ever associate with input policies that are designed and provided. There is also a lack of emphasis on improving policy effectiveness and efficiency, and inadequate attention to integration with complementary policies.

65. Although the high diversity of Africa’s agro-ecological condition makes it possible for a wide range of agricultural production to take place in the continent, agricultural input policies have been disappointing over the three decades between the early 1970s and the turn of the new millennium in 2000 due to ineffective, inconsistent, uncoordinated and inappropriate policies.

Other reasons for the disappointing performance of Africa’s agricultural input development policies include poor political and economic governance, inadequate funding for policy implementation, corruption, fragmented and overlapping agricultural institutions, lack of coordination between and within different levels of government, and poor access of farmers and other private investors to production credit.

66. Decades of inefficient policies and public interventions, coupled with unique agro-ecological conditions have resulted in an inefficient, and some would argue, non-existent commercial input market in much of rural Africa.

67. In most geographic regions and for most crops, agricultural inputs can increase yields and thus improve incomes. But consumption of agricultural inputs can be unprofitable if the farm gate prices are too high for farmers to afford or the risk level is unacceptable. In other words, if the price of inputs relative to outputs is not an incentive for farmers to use it, then there will be no effective demand. On the flip side, the price has to be set accordingly so that it is profitable for distributors to supply it but still be within the range that farmers can afford.

68. High transaction and marketing costs are common in Africa, and can eat into suppliers’

profit margins; these high intermediate costs are then transferred to farmers in the form of high prices. For instance, in the case of irrigation, investment has been limited due to historically low economic rates of return. It is important to note that almost all large-scale irrigation projects in Africa are publicly funded.

69. In the 1970s and 1980s, these projects had very high costs per hectare (one project in Nigeria was estimated at $27,000/ha in 2000 terms) and low or negative rates of return (African Development Bank, 2007). The high costs of providing this input included low market access for outputs and low productivity, stemming from low access to complementary inputs such as seeds and fertilizers (African Development Bank, 2007).

70. Broadly speaking, the constraints may be two-fold: those affecting a farmer’s demand or desire to purchase the inputs and those affecting the trader’s supply or incentive to provide agricultural inputs. Using the framework from Kelly, Adesina and Gordon (2003), the constraints can be generally grouped as knowledge constraints, financial constraints and risk constraints.

71. Figure 19 shows a detailed breakdown of the two categories along with questions that may help in addressing each type of constraint.

Demand side constraints

72. Farmers generally ask two questions about inputs before purchasing them: Will they be profitable? Can they acquire them and use them effectively? The constraints that may inhibit farmer demand for inputs generally involve knowledge, finances and risks.

73. Farmers need to be aware of the inputs, their benefits and how to appropriately use the technology. This may require extension services, marketing campaigns or farmer trials. In addition, farmers must be able to access the inputs and afford the inputs. Finally, farmers will weigh whether purchasing and using the inputs requires taking any unnecessary risk and if it is the best use of their available resources.

74. Yield risk is especially high in Africa due to the frequency of weather shocks and the volatility and uncertainty in producer prices (Morris et al., 2007). This can be further worsened by poorly timed influxes of foreign aid.

Figure 19: Identifying and reducing agricultural input constraints in Africa

No

inputs that he is not using? Does trader believe there is

effective demand?

Are inputs the best use of available financial

Source: Kelly, Adesina and Gordon, 2003.

75. In the past, weak incentives had further constrained farmer demand. Initially it was thought that crops grown in Africa had a poor response to fertilizer due to soil fertility issues.

In general, some crops respond better to fertilizer than others. Yanggen et al. (1998) found that crop responses to fertilizer were comparable to responses in Asia and Latin America when comparing regions with similar agro-ecological conditions. For instance, the response to fertilizer application is actually quite high for maize and rice in comparison to other cereals and is in part due to the fact that maize and rice are often produced in zones characterized by higher rainfall or under irrigation (Morris et al. 2007). This explains why maize is fertilized more often than any other staple (even though less than 40 per cent of total maize grown in Africa is actually fertilized) (Kherallah et al. 2002). Most cereals, however, do not generally respond well to fertilizer and generally have lower output prices, which makes the application of fertilizer to them unprofitable. Since evidence shows that farmers are more likely to apply fertilizer to crops that have a high value-to-cost ratio (Kherallah et al. 2002), they are unlikely to demand fertilizer for cereals other than rice and maize.

76. It is often profitable to apply fertilizer to cash crops, but not always in Africa (Morris et al.

2007). While there are many cash crops that are commonly fertilized, the share of total fertilizer applied to these crops in Africa is relatively small. In fact, total fertilizer applied to maize is higher than that applied to cash crops, but this is because maize is more widely grown. However,

it is important to note that farmers who grow and fertilize cash crops are more likely to use fertilizer on their food/staple crops, which may reflect familiarity with the input or better access to financial resources (Kherallah et al. 2002).

77. Demand for one input is interrelated with demand for other inputs. Figure 20 shows the benefits in terms of yields of utilizing a combination of both seeds and fertilizer compared to just one input at a time. When farmers used a combination of both hybrid seeds and fertilizer, their yields were higher than if they had used neither or just one of the inputs exclusively. It is unclear whether fertilizer consumption causes the adoption of hybrid seeds or vice versa, but in many countries use of the two inputs seems to grow in parallel to one another (Kherallah et al.

2002).

Figure 20: Maize Yields by Seed-Fertilizer Combination Group in Kenya, 1997-2007

0 2 6 8 10 14 16

Neither Traditional seeds and fertilizer

1997 2000 2004 2007

Hybrid seeds and no

fertilizer Hybrid seeds and fertilizer 4

12

Source: Ariga et al. 2009.

78. A similar pattern can be seen for irrigation. For example, in Madagascar, regions with a higher percentage of area under fertilized irrigated rice cultivation had much higher yields (3,200 kg/ha) than regions with lower levels of fertilization (1,966 kg/ha), despite both being irrigated (African Development Report, 2007).

Supply side constraints

79. The supply side constraints that prevent traders and the private sector from entering or developing input markets fall into the same categories as on the demand side. First of all, the trader must be able to perceive the effective demand and it must be high enough to prompt them to provide the input. In Africa, traders have long perceived low effective demand due to the isolation of farmers in rural areas and lack of a clear communication pathway between farmers, traders, and extension workers. In addition, the trader must have adequate access to credit or financial resources in order to maintain inventory and provide a reliable supply of inputs. In order to meet a price at which farmers can afford suppliers will weigh transportation and other transaction costs to determine if providing the input is even profitable. Suppliers will evaluate the level of risk involved in entering the market. For instance, does the government intervene periodically with free inputs that would disrupt their income? Frequent, yet inconsistent public interventions in the sector do provide poor farmers with adequate inputs temporarily, albeit at a substantial cost both fiscally and in terms of the overall market. These disruptions greatly reduce the reliability of input distribution by undermining incentives for private fertilizer dealers (Morris et al. 2007). Moreover, Africa has long had an unfavorable business climate, which makes private firms reluctant to invest in fertilizer marketing (Morris et al. 2007). Inhibiting factors include weak regulatory enforcement, high taxes and fees and widespread corruption.

Other constraints

80. Regarding the supply of different inputs, other major constraints faced by the private sector in Africa include:

High costs: The input industry requires huge capital investments, especially in a. infrastructure and machinery for production and processing. Raising such capital is

difficult, especially when credit facilities are inadequate and interest rates are high;

High risks: The input industry is full of risks and uncertainties. Input supply is carried b. out under unpredictable conditions;

Macroeconomic instability: Fluctuating exchange rates and high levels of inflation c. discourage investments in input production, processing, and marketing generally;

Low demand for inputs: The demand for improved inputs is very low, due to inadequate d. promotion and marketing efforts, high prices, and inability of farmers to get timely

Low demand for inputs: The demand for improved inputs is very low, due to inadequate d. promotion and marketing efforts, high prices, and inability of farmers to get timely